The Wartime Economy and the Untold Reason Behind China’s Abysmal Domestic Consumption

Hi, everyone. Welcome to Lay's Real Talk. It's the last week of August. We're almost at the end of summer. Summer went by so fast. Before we know it, it's fall. Fall is coming. Okay, all right. So for those of you who prefer my red wall background, I'm sorry that I'm gonna put you through this floral environment, or floral background for 30 minutes or 40 minutes. Anyways, we know China's economy isn't doing well, and many people wonder why Xi Jinping isn't doing something to rescue it, right? There are many things that economists say that can be done to save China's economy, but he's not doing any of those. So people have the question, why isn't he fixing China's economy? Well, experts have offered their opinions. So in June, Foreign Policy Magazine had an article with the same title as my topic tonight, which is why is Xi not fixing China's economy? And it's written by Scott Kennedy, a senior advisor and trustee chair in Chinese business and economics at the Center for Strategic International Studies, CSIS. Kennedy was a professor at Indiana University, and is a leading scholar on China. He summarized four reasons based on the conversations he had with people. So the first one is Xi Jinping doesn't know how bad the economy is because his officials have kept him in the dark. And the second reason is he doesn't know what to do to rescue the economy. Number three is he doesn't care. And Mr. Kennedy said this is the least popular view, but those who believe it are passionate about it. And I'm one of those very few who are passionate about this view. And the fourth one is he doesn't agree with Western experts that the economy needs to be rescued or resuscitated. Now, I agree with Mr. Kennedy's conclusion, except a minor disagreement with him on number two. Maybe he and I don't disagree. I just wanna clarify that. I don't think Xi Jinping believes he doesn't know what to do. We think he doesn't know what to do, but he believes he's in control of the situation. Now, my answers to the same question, why Xi Jinping isn't fixing the economy is, I have two answers. The first is he's transitioning China's economy into a wartime economy. And number two, he knows China's economy is beyond any remedy. And I'll explain that why. And I'll give you the answer. It is because China's population today isn't what it was four years ago. So the underlying assumptions about China's economy or economic growth have been fundamentally changed. All right, so let's talk about the first subject, the first topic, why I'm saying he doesn't care about fixing China's economy because he's transitioning it into a wartime economy. If you look at the textbook definitions of a wartime economy, you'll be shocked to see that Xi Jinping has been following the textbook to prepare China, to steer China in that direction. So definition of a wartime economy is typically characterized by the following six features. One, centralized control. The government exerts significant control over the economy, directing resources toward strategic sectors that will support the war or war initiatives. Second is resource mobilization, large-scale allocation of resources such as labor materials and capital for the production of material goods, not material goods, military goods and services. And the third is rationing and scarcity measures, implementation of rationing system for consumer goods and services to prioritize military needs. Number four is increased government spending, such as substantial increases in defense and military budgets at the expense of civilian sectors. Number five is nationalization of industries, key industries being nationalized and heavily regulated to align with wartime objectives. And the last one is propaganda and nationalism, use of media and propaganda to boost morale and support for the war initiative. The above six attributes match 100% with Xi Jinping's priorities in the past 12 years, particularly in the past four years. So from turning private companies into state-owned property, to consolidating large SOEs, state-owned enterprises, consolidating large SOEs into supersized SOEs, to the establishment of public canteens, to practicing food rationing during COVID lockdowns, to the recent announcement of implementing an internet ID system. These administrative measures all geared toward a wartime economy. China's totalitarian economic system under Mao was also a wartime economy because it matched with those six features. It went almost bankrupt during Deng Xiaoping's time, who announced the economic reform to save the regime. But in this system, in the CCP's communist economic system, production capacity is always more important than market price and demand mechanisms because sufficient production capacity is needed to sustain war demands. This concept is emphasized and taught in CCP's own political and economic textbooks or curriculums in schools, particularly back in the 1970s, maybe 80s. For example, in the 1970s, they cited the example of Japan's steel production capacity of 10, almost 11 million tons at the time. From the CCP's perspective, their scholars, the CCP leaders and scholars at the time believed that that kind of a steel production capacity was sufficient for Japan to launch a war against China. So from CCP's economy's perspective, production capacity determines war capability, not consumer confidence or consumption levels. So this wartime economy concept has determined that when Beijing injects money into China's economy, it won't flow, the money will not flow into the consumer side, but rather it will go into production side. The emphasis on production is inherent in China's planned slash wartime economy. As a result, the excessive investment in production, you wonder why China, despite the fact that people don't have money to spend and Chinese consumption is so low and then the government is still pumping money into infrastructure, into massive production capability, you wonder why, but it's driven by this wartime economy concept. As a result, the excessive investment in production has led to significant domestic overcapacity in production. And when China exports its overcapacity, then the price dumping in other countries, in other economies becomes a type of economic invasion. So we've seen this in the EVs, in solar panels, cement, aluminum, textile and garment, and steel industry among others. What I want to say is, it all came from the concept of a wartime economy, even in peacetime, even though the CCP isn't launching a war or a military attack on other countries, but its economic behavior still equates to an evasion of economic nature. So that's why Xi Jinping would never stimulate consumption by giving money to the Chinese people. With a strong consumer economy, his war economy will fail. So that's my first answer to the question, why he will not fix China's economy from our perspective, because everyone who's asking this question is saying that from the Western economic perspective, from the Western market economy, he should have done that, but from his perspective, it's not. It would make his agenda fail. The second reason, which I think is, I don't think anyone has talked about it. I'm trying to make an attempt to make sense out of something that's almost impossible to explore or to analyze, but I'll make an effort. You can tell me that I'm not doing a great job. I'm not offended at all, because it's my best effort trying to pull something together. The second reason why Xi Jinping doesn't want to fix China's economy is that he knows it's beyond repair. Here's one important factor that has been ignored by all Western experts, and that is the question about the size of China's consumer market. It's no longer the same as it once was. So now let's talk about China's abysmal domestic consumption because Chinese media and Western media all have commented on it. Let's talk about luxury brands, because we know Chinese love luxury brands such as Louis Vuitton, Gucci, Burberry, and so on and so forth, but they're not doing well in China. It's called Luxury Insight. Their data indicates that in 2024, the average discount for products from the Italian brand Versace and the British brand Burberry across all distribution channels in China reached 50%, and some even exceeded 50%. Now, you never see these brands go on sale outside China, right? I mean, luxury brands don't go on sale, but the fact that they have reached 50% discount or even more than 50% in China is shocking. And in early July, Marc Jacobs launched a discount of over 50% on handbags, clothing, and shoes on Alibaba's premium e-commerce platform called T-Mall Luxury Pavilion, where Bottega Veneta, the Italian leather brand, that they're known for their braided handbags and leather goods, Bottega Veneta offered 24 months of interest-free loans when you buy their handbags or bags. I also read somewhere that Gucci's sales in the Chinese market fell 20% maybe in the second quarter. I'm not quite sure which quarter. I think it's in the second quarter of this year. And then a French restaurant known as the landmark of luxury dining in Shanghai, it's called L'Atelier 18. It's atelier in English, and French is l'atelier, l'atelier, 18. A French restaurant known as the landmark of luxury dining in Shanghai just closed suddenly. Now, Shanghai has many high-end dining establishments. At its peak, China had 2,700 such dining establishments. And when I say high-end dining, with average per person cost exceeding $75, I mean, maybe in New York isn't really high-end or high, high-end, but in other parts of the U.S. or in China, not everyone can afford that. It's pretty expensive. So at its peak, China had 27, I mean, Shanghai, sorry, Shanghai had 2,700 such high-end dining establishments. By July, 1,400 had closed. So more than half have closed their business. Now, Chinese love food and eating out, but the food service industry in general isn't doing well. According to data from the National Bureau of Statistics of China, this is the official government statistics, in the first quarter of this year, 459,000 food establishments deregistered their business, representing an increase of 232% compared to the first quarter of last year. So I think last year it was 150,000 food establishments closed, deregistered, I mean, closed their business last year. Now it's three times, it's 459,000. And that includes some famous restaurant brands. And yesterday, Taiwan's famous restaurant brand, Din Tai Fung, I'm sure you have all heard of it, announced that it will close its 15 restaurants in Northern China, including those in some of Beijing's landmark shopping malls. But the restaurant will continue to operate 24 restaurants in East China region, including Shanghai. So on the surface, the closing of the restaurants was due to expiration of a 20-year license for the brand in Northern China. But according to Taiwanese media, Din Tai Fung's chief executive once claimed that 20 to 30% of its customers in Beijing were foreign nationals. Now with the continued exodus of foreign national companies and decline in tourists, no restaurant can survive when they lose 20 to 30% of their customers. So by the way, Din Tai Fung was named, I don't know if you have, maybe some of you know Din Tai Fung, it was named one of the world's top 10 gourmet restaurants in 1993 by the New York Times. And its Hong Kong restaurant was awarded a Michelin star. It was the first Chinese restaurant chain to earn a Michelin star. And the restaurant now is in 13 countries with 170 restaurants. It's in the U.S. on the West Coast, from Oregon, Portland to Washington, or from Washington to Oregon and then to California. And they just opened one on the East Coast in New York, in New York City. All right, that's just a side note on the restaurant because I love the restaurant. The quality is consistent after how many years? 70 years in business? The service and quality have been consistent and that's amazing for 70 years. Anyways, that's just a side note on the restaurant. Now, here's my question. Have you thought about why Chinese suddenly stopped loving luxury brands and stopped eating out? Well, the answer people have been given is Chinese don't have money anymore. The middle class is experiencing unemployment and pay cuts. The wealth of private business owners and entrepreneurs is shrinking. A significant portion of their wealth comes from the stock market and the real estate market, which have both suffered great losses. It is true that the Chinese people don't have as much money as before, but there's another reason that people haven't paid enough attention to. That is China's consumer market isn't as big as before because China has far fewer people now. And how can that be? Where did the people go? My answer is high COVID casualties. I talked about this before and it's very difficult to prove mathematically China's real COVID casualties because Beijing, first of all, Beijing has been hiding the data and it has been systematically destroying COVID related statistics or documents from hospitals. In the past year, it has been, Chinese hospitals have been ordered to destroy records and reports related to COVID casualties or anything related to COVID. So we'll probably never know how many people actually died during the pandemic, but we can indirectly know how many are left. I think China's abysmal consumer confidence is the direct result of large attrition of the population during the pandemic. And how do I know this? I'll tell you my logic. Today, Nikkei Asia reported that 20,000 Chinese kindergartens were closed in the past two years. The closing of the daycare centers started in 2022 and worsened in 2023. And according to Chinese media reports, the amount of daycare centers closed in 2023 was three times that of 2022. And this has never happened in China before. In the past, Chinese parents have to pay or had to pay a hefty price to put their children on waiting lists to enroll in some of the good daycare centers. And now there isn't enough children and they're closing. So this is what Nikkei Asia said. The title said, China's kindergarten closure foreshadow economic hit from falling births. 20,000 schools shut in two years. Beijing seeks urgent solutions as workforce shrinks. Everybody just stops at the fact that China's new birth has declined, but we have to go one step further. We have to ask ourselves questions because some of the phenomena explained in these media reports don't make sense. Anyone with a good common sense, with a good logical mind can figure out it's not normal. It's not natural attrition. It's not natural low birth rate as a result of reduced population or reduced desire in having children or having a family. And here's my reason why. Now, this is not the first time we heard about this. The first time we heard this was September last year. Chinese media outlets extensively talked about the large number of kindergartens closing during the annual back to school week. At the time, Chinese media was shocked to report the sudden bankruptcy or closure of daycare centers across China. I found a Shanghai-based Chinese media called Pengpai News. This is what it said last September. So this is, I'm just reading your translation from their media report. It said, by analyzing various local educational developments this statistical bulletins, I think it's a report, it's a published government report. It's called Educational Development Statistical Bulletins. So the media said by analyzing various local such bulletins and other documents, the paper, which is Pengpai News has compiled data on the current state of preschool education in 2024. I mean, sorry, 2023. From four municipalities directly under the central government and 293, so the four municipalities, direct municipalities are Shanghai, Beijing, Tianjin, and Chongqing, right? So it studied the four large cities and then 293 prefecture, sorry, prefecture, prefecture. Lay's challenged today to pronounce English word properly. Prefecture, prefecture, sorry. All right, you guys can help me with that word. I used to know how to pronounce this word. What happened to me? I think I get too excited about talking about daycare center. Anyways, anyone wanna help me? Okay, you know what I'm saying. I think county level, let me just use the word county. 293, so the paper studied the four direct municipalities and 293 counties across the country. And they find that 80% of the regions experienced a reduction in the number of kindergartens in 2023. So it's 80%, it's widespread across the country. And then it says in small cities, in smaller cities, kindergartens are being closed en masse while in large cities, their numbers continue to grow. So the problem persists in smaller cities. And the paper also mentioned that in some areas, kindergarten closure rates was 20 or even 30% in 2023. It's not an isolated cases because I read other reports. They quoted the closure rate was like 25%. So 20 to 30% seems like the average closure rate in those smaller cities and smaller towns that had this problem in 2023 is 20 to 30% closure rate. Now, let me repeat what I said. 80% of the smaller cities and towns, oh, no, wait a minute. 80% of the cities they studied experienced reduction in the number of kindergartens in 2023. Almost all of the reductions took place in smaller cities and towns. In some area or the rough average is 20 to 30%. The high is 30%, the 20% is a good average. Some Chinese media also reported that the closures were so sudden that some new centers that opened in 2021 and 2022 were forced to close because they had no business. There were no children. So it was not like people saw a gradual decline in the number of new births. It happened suddenly. Otherwise, these daycare centers wouldn't open in 2022. Now, everyone is attributing it to low birth rate, but the low birth rate of this massive scale in smaller towns and cities isn't normal. How can China's low birth rate is 20 to 30% lower in these places? We're not talking about 5%, 10%. We're talking about 20 to 30%. And why is it particularly lower in smaller cities? What about rural China? I don't think the Shanghai paper included the villages and the rural areas in its study because you don't have data to collect from those areas. So if we include rural China, it could be even worse, right? And also if low birth, if the birth rate is so low, why is it suddenly low? Let me tell you a little bit about China's daycare centers. There are the public daycare centers and there are the private ones. The public daycare centers accept children from age three and older, three and above. The private daycare centers accept babies as young as one year old or two year old. They don't have that age restriction. So if you have young children, you send them to private daycare. And also public daycare centers won't go bankrupt because they're supported by the government or they're affiliated with SOEs. And even if they do close, they won't become news. We won't know about them. So the reason why we suddenly saw a large number of daycare centers go bankrupt is that China's new birth from 2020 to 2022 were somehow suddenly dropped by more than 20 to 30%. Some daycare, I think the number of new births, the reduction in the amount of newborns had to be higher than the 20 to 30% daycare center reduction because some daycare centers experienced reduction, reduced enrollment, but they're still open. They still remain in business. They didn't go bankrupt. So the actual reduction in the number of children had to be higher than 20 to 30% in order to have 20 to 30% daycare centers to go belly up. But why did China experience a sudden dip in new birth in one to two years? Could it be a sudden attrition to its child-bearing age population? My argument is that a sudden drop in birth rate over, you know, in this case, a 12-month period, right? It started in 2022 and it just worsened in 2023. So a sudden drop in birth rate over a 12 to a 24-month period in a scale of 20 to 30% has to be related to either war or a major natural disaster. It's not natural. It's not the natural, it's the result of people just don't want to have children or people just don't want to get married. That kind of a scale over such a short period of time has to be the war or a natural disaster. In 2023, the kids born during COVID, think about it, were one or two years old. They were not old enough to go to the public daycare centers. And their parents, you know, their parents sent them to private daycare. And in 2022, it wasn't a problem because many parts of China were still in lockdown mode. So parents were still at home and they were taking care of the children. And also many of the daycare centers weren't open in 2022. But in 2023, parents were back to, I mean, back to work and the daycare centers were all open for business. Suddenly they realized, you know, there weren't that many kids. Some people may argue, well, could it be that people just, you know, during lockdowns, people were so stressed out, they just decided not to have children? I think it may be the case for some people, but, you know, on the other hand, when people are at home, couples tend to have more babies because they are at home, you know, 24 seven. So I don't think that's a major factor. I think, I don't think it's a major factor. If there's a factor, it's not in the scale of 20 to 30%. This confirms my previous assessment that most of the COVID casualties happened in rural China and in smaller towns and cities. They didn't happen in large cities. That's why people don't talk about it. And so if we assess the reduction in the number of new births in rural China, it could be much worse than what we saw. So to summarize, a sudden reduction in new births in the scale of 20 to 30% over a short period of time isn't normal. It has to be related to massive population reduction. Xi Jinping and his Politburo certainly know, know the reason behind it, but they're hiding the fact. They know China's economy cannot be measured in the same way as before. When you have lost that many people in a country, the economy isn't the same. Any trend analysis on key economic measures, in my opinion, isn't applicable anymore because the numerator and the denominator have all changed because the per capita data is wrong because you don't have that many people. So that's my thoughts on this subject. It's a very rough, high-level estimate. I have no other ways of getting any information out of China. I hope those of you who have the means to gather data should come up with, should do more digging on this subject. I believe somewhere and somehow in the near future, we can prove that the real population in China is far below the acclaimed 1.4 billion. That's all, that's all for tonight. I can change the subject to the title of tonight's talk to why China doesn't have 1.4 billion people or why I don't believe China has 1.4 billion people. Maybe I'll do that afterwards. Okay, all right, let me see what people think. All right, let's see. I saw some super stickers. I, excuse me. Peter John, well, thank you, Peter. Okay, let's see. Dave M., wow, thank you, Dave, for the generosity. Lei, some of the stories you've read and the videos you have watched must be gut-wrenching. Thank you for your continued effort to explain the situation in China to those of us who cannot access or decipher what's happening there. Well, thank you very much. I sent my newsletter last night and I said that it's becoming increasingly impossible for me to make videos or talk about China because it's mentally disturbing some of the things that are happening in China. In fact, I also don't want to talk about them because I don't know what YouTube would do to my video and I don't want it to restrict my views because I do need the ad revenue. So it is very, it's mentally disturbing. I mean, for example, I saw videos and pictures showing young women and they're not offering themselves, I mean, what do I call them? They do prostitution as a sidekick, as a side job and you see they line up certain parts of these major cities in China and I saw one post, a picture, actually a video, guess who helped her do the marketing? Her father. And in some cases, I read that in the past, when China's economy wasn't doing well, you will see husbands, that was in the 1990s, husbands rode on bicycles with their wives, drove their wife to certain parts of the city for their wives to offer their service and that happened in the 1990s and I think it's happening now again. So I think when things like that happen, any financial analysis, any so-called expert opinion on how to save China's economy becomes irrelevant because it has already passed the point to be saved. So I appreciate your generosity, but you're right, it is heart-wrenching to read some of the stories. And by the way, it's very sad to report to you that a lot of them have come to Flushing. I saw the same video somebody shot, it was not in China, it was not a Chinese city, it was in Flushing, New York. You see women line up the streets, Chinese women line up the streets, offering their service and there's just something wrong. There's something wrong there and there's something wrong here too, don't you think so? And I think, and then you wonder, well, who are their customers? Who are their customers? When we're in a country, when we're in a time where men don't wanna get married, I mean, that's a problem in China. There's so many Chinese men, young men who do not want to get married, do not even wanna date. They're afraid of relationship because of the emotional burden and the financial burden. So I think a lot of people have talked about that, right? The marriage rate, the birth rate, everything in China has declined because people don't wanna be in a relationship. And when that happens on one hand, and then prostitution is a problem on the other hand, because they go hand in hand. And I just read somewhere in this country, same problem. Young people do not wanna get married and do not wanna have children. So when that happens, then prostitution will become a problem. So it seems that the same problem is happening across the Pacific. So, all right, Norbert Klotz. There are too many men who cannot find a woman and there are many women who cannot afford to have a child because they cannot make any money. A child is too expensive. Actually, I'm making a video about why young Chinese people do not wanna get married. It's the same problem. Chinese men cannot find a wife and the Chinese woman cannot find a husband. There's a big mismatch in the Chinese population and it's very serious. It's not like you have more women in China, then therefore, I'm sorry, it's not like you have more men in China so then every Chinese woman is highly marketable and then they can have many choices in finding a husband. That's not the case. There's a big mismatch in the Chinese population. Mike Dixon, how many people are leaving China to live abroad? I don't know, but I think everyone who has the means and then the ways to leave China are doing something to leave. Yeah, but a lot of them do not have the financial means to leave China. Let's see. Sumilint, is my relative that came to the U.S. to marry my relative, my relative that came to the U.S. to marry my relative 12 years ago blessed? She took a big risk but has two beautiful children and married and lives in a fine house. Well, I think after 12 years, if she's happy, happily married and have two children, I'm sure everything worked out well for her. I'm happy for her. So sounds like she's living a good life. Good for her. That's Nick Fury. Every time I pronounce her name, I have the urge to say furry, even though I now know it's Fury. Flushing, New York City is now the largest Chinatown in the U.S. Yes, it is. It is. I think it's bigger than San Francisco. San Francisco's Chinatown, it used to be the largest, but I think Flushing is now the largest, yeah. The New York Times many years ago did a long piece on prostitution in Flushing. It was quite a number of years ago. Yeah. In another YouTube channel, we are entering dark times. Stay vigilant. I agree. Everyone should stay vigilant. Be kind. Be good to your family. I agree that we're entering a very weird period in history. Okay. All right. That seems to be all. NYC is not safe. It is not safe. All right, any other questions? I think I reached the bottom. That seems to be all. All right. Okay, here we have someone whose name is unknown. Oh, here's a question from, why are so many products, from Mike Dixon, why are so many products now made in China poor quality and the wrong size? Because people have lost interest in their, when your overall economic environment is healthy, and when people still believe in the system, they try to do a good job, they work hard to make a living. Now, it's like whatever you can do to get by, and then also a lot of the bosses don't pay their employees. There's so many stories about employees not getting paid. So when people do their job, they're not even sure if they will be paid for their work. So how do you think they're gonna do a good job? Right, if they're only 50% sure that they will be paid, I don't think people are gonna do a good job. So they just do whatever they can to get by. So a lot of the products that are made in China are gonna be, I mean, they're crappy. All right, cost cutting, that's all. I think I reached the end of the question. Oh, there are more. shiny, shiny man. Shiny. The Chinese entering from southern border are all men of fighting age. This looks more like PLA infiltration, doesn't it? Well, there are some women too. I don't think, there are many people crossing the border from the South. Of course, young men are a large group, but there are women too. Logician 3, many stories about people starving to death in China recently. Is the famine you talk about starting? Famine today, the definition of famine has changed. I think the famine has already started. It's just that we don't see them. I mean, in the old days, when we say famine, we see people from the whole village coming out, looking malnutritioned, right? That's our visual perception of a famine. But in China now, you don't see that anymore. But you hear about people dying from hunger sporadically across a large city. I think anyone dying from hunger, anyone who should not die, anyone who's college educated, who's smart, who wants to do a good job, who wants to find a job but cannot or couldn't and died from hunger is famine. That means famine has already started in that city or in that country. Odds. Odds? Samsung paid a good exit package when it closed its China plan. Yeah. IBM just announced that it's gonna close its R&D center in China. It should have long closed its center. I think Microsoft also offered packages to some of its R&D staff to work in Washington in the US. We heard about that. So more and more companies are closing their Chinese operations. Jeff Ramos, possibility of civil war in China or USA. Civil war. Excuse me. Civil war in China is, I think riots of various scales is possible in China. But civil wars are not likely in China because civil wars usually have two groups of people of equal size or of relatively similar size that are at odds with each other. But you don't have that in China. Chinese people are pretty much all together. They're against the government. So how could they, so it's either the people getting together, overthrowing the government. It's not a civil war. The civil war is when you have a group of Chinese fighting another group of Chinese, but I don't see what are they fighting with each other for. They don't have any disputes in China. So I think civil war in China is unlikely. In the US, well, it depends on what happens. It depends on what happens at the next general election. All right, let's see. I'll take a few last question. Okay, I'll just pick this question. From Odds, from Odds, where did it go? Can the Chinese famine be considered murder by hunger by the CCP? Yes, I think that's a very accurate way to put it. It's murder by hunger. Murder by poverty. I think murder by poverty is more accurate. All right, okay, that's all for tonight. I will stop it here. Enjoy the last week of August, and I'll see you in a few days. Okay, bye.